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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 20212022

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ___________ to ___________
	Commission File Number: 1-12911

GRANITE CONSTRUCTION INCORPORATED

State of Incorporation:	I.R.S. Employer Identification Number:
Delaware	77-0239383

Address of principal executive offices:

585 W. Beach Street

Watsonville, California 95076

(831) 724-1011

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value	GVA	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 22, 2021.21, 2022.

Class		Outstanding
Common stock, $0.01 par value		45,826,73543,730,055

 

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PART I. FINANCIAL INFORMATION

GRANITE CONSTRUCTION INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited - in thousands, except share and per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

GRANITE CONSTRUCTION INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited - in thousands, except per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

GRANITE CONSTRUCTION INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited - in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

GRANITE CONSTRUCTION INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited - in thousands, except share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

GRANITE CONSTRUCTION INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited - in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.  General

Basis of Presentation

Presentation: The condensed consolidated financial statements included herein have been prepared by Granite Construction Incorporated (“we,” “us,” “our,” the “Company” or “Granite”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), are unaudited and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20202021 (“Annual Report”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. Further, the condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to state fairly our financial position at September 30, 20212022 and 20202021 and the results of our operations and cash flows for the periods presented. The December 31, 20202021 condensed consolidated balance sheet data included herein was derived from audited consolidated financial statements but does not include all disclosures required by U.S. GAAP.

We prepared the accompanying condensed consolidated financial statements on the same basis as our annual consolidated financial statements. Our policy related to derivative instruments was expanded, as follows, to reflect treatmentstatements, except for the adoptions of Accounting Standards Update (“ASU”) 2020-06,Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) on January 1, 2022, ASUs 2020-04,Reference Rate Reform (Topic 848): Facilitation of the interest rate swap de-designation that occurredEffects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) and 2021-01,Reference Rate Reform (Topic848): Scope (“ASU 2021-01”), on June 30, 2022, the impacts of which are described in Note 2.

Stock Purchase Programs: On May 2, 2022, we entered into an accelerated share repurchase agreement (“Accelerated Share Repurchase”) with Bank of Montreal. The Accelerated Share Repurchase was entered into pursuant to the existing share repurchase program. On May 2, 2022, we paid $50.0 million to the bank and received 80% of the notional amount, or $40.0 million, in shares using the closing price on the trade date. This equated to approximately 1.32 million shares, which were immediately retired. On August 31, 2022, the reference period ended and on September 2, 2022 Granite received an additional 0.37 million shares, which were immediately retired. The final share delivery was based on the average of the daily volume-weighted average prices of Granite’s common stock, less a discount, during the reference period. The Accelerated Share Repurchase is primarily included in Additional paid-in capital on the Condensed Consolidated Balance Sheet as well as in Repurchases of common stock on the Condensed Consolidated Statement of Shareholders’ Equity and within Financing activities on the Condensed Consolidated Statements of Cash Flows.

Discontinued Operations: During the threefourth months endedquarter of June 30, 2021,which is further we concluded that the assets and liabilities of our former Water and Mineral Services operating group (“WMS”) met the criteria for classification as held for sale and the results of operations were presented as discontinued operations. This included: our trenchless and pipe rehabilitation services business (“Inliner”); our water supply, treatment, delivery and maintenance business (“Water Resources”); and our mineral exploration drilling business (“Mineral Services”). During the first quarter of 2022, we completed the sale of Inliner. As discussed in more detail in Note 9.3,

Derivative Instruments: We recognize derivative instruments as either assets or liabilities in the consolidated balance sheets at fair value using Level 2third inputs. To receive hedge accounting treatment, derivative instrumentsquarter of 2022, we determined that are designatedthe remaining WMS businesses, Water Resources and Mineral Services, no longer met the criteria for classification as cash flow hedges must be highly effective in offsetting changesheld for sale, and therefore also no longer qualified for presentation as discontinued operations. We reclassified WMS from discontinued operations to expected future cash flows on hedged transactions. We formally document our hedge relationships at inception, including identificationcontinuing operations and it is reported within the Mountain operating group. The operations of the hedging instruments andremaining WMS businesses fall within the hedged items, our risk management objectives and strategies for undertaking the hedge transaction, and the initial quantitative assessment of the hedging instrument’s effectiveness in offsetting changesConstruction segment. Prior periods presented in the fair value of the hedged items. The effective portion of the gain or loss on cash flow hedges is reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified to thecondensed consolidated statements of operations whenhave been conformed to the periodic hedged cash flows are settled. Adjustmentscurrent period presentation. The assets and liabilities of WMS met the criteria for classification as held for sale as of December 31, 2021, therefore our condensed consolidated balance sheet continues to fair value on derivativesreflect these assets and liabilities as held for sale as of that are not part of a designated hedging relationship are reported through the consolidated statements of operations. We do not enter into derivative instruments for speculative or trading purposes.date.

Seasonality: Our operations are typically affected more by weather conditions during the first and fourth quarters of our fiscal year which may alter our construction schedules and can create variability in our revenues and profitability. Therefore, the results of operations for the three and nine months ended September 30, 20212022 are not necessarily indicative of the results to be expected for the full year.

Cash, Cash Equivalents and Restricted Cash: The table below presents changes in cash, cash equivalents and restricted cash on the condensed consolidated statements of cash flows and a reconciliation to the amounts reported in the condensed consolidated balance sheets (in thousands):

2.  Recently Issued and Adopted Accounting Pronouncements

In AugustMarch 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06,Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for convertible instruments resulting in accounting for convertible debt instruments as a single liability measured at its amortized cost. This change will also reduce reported interest expense and increase reported net income as we issued a convertible instrument that was bifurcated according to previously existing rules. In addition, the ASU requires the application of the if-converted method for calculating diluted earnings per share and eliminates the treasury stock method for convertible debt. The ASU is effective commencing with our quarter ending March 31, 2022. We currently anticipate adopting this ASU using the modified retrospective transition approach.

Upon issuance of the 2.75% convertible senior notes due 2024 (“2.75% Convertible Notes”), cash received was separated into a $192.6 million debt component and a $27.9 million (net of $9.5 million in taxes) equity component. We have been increasing the debt component for the difference between the principal amount and the $192.6 million (“debt discount”) with an offset to interest expense over the life of the loan using an effective interest rate. Upon adoption of ASU 2020-06, interest expense previously recorded and remaining to be recorded from the debt discount will be reversed through retained earnings with an offset to debt, net of tax. We estimate this impact to long-term debt and retained earnings to be between $20 million and $40 million. In addition, using the if-converted method as compared to the treasury stock method may have a material impact to diluted earnings per share if the Company is in a net income position.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for the effects of the transition away from LIBOR and other reference rates. Also, in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic848): Scope, which provided clarification guidance to ASU 2020-04. TheseWe adopted these ASUs are effective at our option beginning with ourduring the quarter ended March 31, 2020 through December 31,June 30, 2022, and we expect to adopt in the second quarter of 2022. Asconjunction with entering into our ThirdFourth Amended and Restated Credit Agreement dated(see Note May 18, 2021, 15as subsequently amended (the “Credit Agreement”), which replaced the London Interbank Offered Rate (“LIBOR”) currently incorporateswith the useSecured Overnight Financing Rate ("SOFR") administered by the Federal Reserve Bank of the secured overnight financing rate as an alternative to LIBOR, we do not expect theNew York for purposes of setting floating interest rates. The adoption of these ASUs todid not have a material impact on our condensed consolidated financial statements.

As of September 30,2022, the 2.75% Convertible Notes comprised our only convertible debt instrument. The 2.75% Convertible Notes were issued in November 2019 in an aggregate principal amount of $230.0 million, with an interest rate of 2.75% and a maturity date of November 1, 2024, unless earlier converted, redeemed or repurchased. The 2.75% Convertible Notes are convertible at the option of the holders prior to May 1, 2024 only during certain periods and upon the occurrence of certain events. After May 1, 2024, the 2.75% Convertible Notes will be convertible at the option of the holders at any time until the second scheduled trading day immediately preceding the maturity date.

The conversion rate applicable to the 2.75% Convertible Notes is 31.7776 shares of Granite common stock per $1,000 principal amount of 2.75% Convertible Notes, which is equivalent to a conversion price of approximately $31.47 per share of Granite common stock. Upon conversion, we will pay or deliver shares of Granite common stock or a combination of cash and shares of Granite common stock, at our election. In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture governing the 2.75% Convertible Notes, (the “Indenture”) we will, in certain circumstances, increase the conversion rate for a holder that elects to convert its 2.75% Convertible Notes in connection with such a make-whole fundamental change.

On or after November 7,2022, we have the option to redeem for cash all or any portion of the 2.75% Convertible Notes if the last reported sale price of our common stock is equal to or greater than 130% of the conversion price for a specified period of time. Upon the occurrence of a “fundamental change” as defined in the Indenture, holders may require us to repurchase for cash all or any portion of their 2.75% Convertible Notes at a price equal to 100% of the principal amount plus any accrued and unpaid interest. In addition, as described in the Indenture, certain events of default including, but not limited to, bankruptcy, insolvency or reorganization, may result in the 2.75% Convertible Notes becoming due and payable immediately.

In connection with the adoption of ASU 2020-06, we implemented the following accounting policy as of January 1, 2022:

Computation of Earnings per Share: Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares include common share equivalents issued under the terms of the 2012 and 2021 Equity Incentive Plans and common share equivalents issuable under our 2.75% Convertible Notes using the if-converted method. Dilutive potential common shares also include common share equivalents issuable under the terms of our warrants assuming the share price of our common stock was in excess of $53.44, the exercise price of warrants.

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

3.  Impairment ChargesAssets and Other CostsLiabilities Held for Sale

Goodwill

We perform our goodwill impairment tests annually asAs discussed in Note 1, during the fourth quarter of November 1 2021, our Board of Directors approved a plan to sell the businesses in WMS within the next twelve months. This included: Inliner, Water Resources and more frequently when eventsMineral Services. After consideration of the relevant facts at the time, we concluded the assets and circumstances occurliabilities of our WMS businesses met the criteria for classification as held for sale. We concluded the proposed disposal activities represented a strategic shift that indicatewould have a possible impairmentmajor effect on our operations and financial results and qualified for presentation as discontinued operations in accordance with FASB Accounting Standards Codification (“ASC”) Topic 205-20,Presentation of goodwill. There werefinancial statements - Discontinued operations. Additionally, beginning noDecember 31, 2021, in accordance with ASC Topic 360, events or circumstances duringProperty, Plant, and Equipment, we ceased recording depreciation and amortization for WMS property, plant and equipment, finite-lived tangible assets and right-of-use lease assets.

During the first quarter of 2022, we completed the sale of Inliner for a purchase price of $159.7 million, subject to certain adjustments. As a result of the sale, we received cash proceeds of $142.6 million based on preliminary post-closing adjustments and we recognized a gain of $6.2 million. This gain is included in Other costs, net in the condensed consolidated statements of operations for the nine months ended September 30, 2022. 30,2021 that would indicate a possible goodwill impairment. 

We performed an interim goodwill impairment test on

In the March 31,third quarter of 20202022, balances ofwe announced our decision to retain the Water Resources and Mineral Services Group Materials and Water and Mineral Services Group Specialty reporting unitsbusinesses. This change to our plan of sale was due to an adverse change in the business climate for these reporting units, including a modified relationship with a business partner, increased competition and market consolidation during the three months ended March 31, 2020, exacerbated by economic disruption andunfavorable market conditions associated withwhich undermined our efforts to secure an appropriate value for the COVID-19 pandemic. These factors ledbusinesses. As a result, we have reclassified WMS from discontinued operations to reductionscontinuing operations for all periods presented. We recorded $7.3 million of depreciation expense and $0.9 million of amortization expense in the revenue and margin growth rates used in our quantitative goodwill tests. The goodwill impairment test resulted in a $14.8 million impairment charge during the three months ended March 31,2020 associated with our Water and Mineral Services Group Materials reporting unit and 0 impairment charge associated with our Water and Minerals Services Group Specialty reporting unit as its estimated fair value exceeded its net book value (i.e., headroom) by over 15%. Interim goodwill impairment tests were not performed on our remaining reporting units as there was no indication of a possible goodwill impairment. 

We performed a second interim goodwill impairment test on the September 30,2020 balances of our Midwest Group Specialty, Water and Mineral Services Group Water and Water and Mineral Services Group Materials reporting units due to the continued impact from an adverse change in the business climate, including reduced market share due to loss of strategic personnel during the three months ended September 30, 20202022, . These factors led to reductionsadjust for depreciation and amortization that would have been recognized in prior quarters if the unsold businesses had been continually classified as held and used from the beginning of the year. $6.9 million is included in cost of revenue and margin growth rates, and delays in the timing of future cash flows used in our quantitative goodwill tests. The goodwill impairment test resulted in a non-cash impairment charge of an additional $117.9 million and $14.4 million associated with our Water and Mineral Services Group Water and Water and Mineral Services Group Materials reporting units, respectively, duringfor the three months ended September 30, 202020, 2022, . The goodwill impairment test for the Midwest Group Specialty reporting unit indicated that its estimated fair value exceeded its net book value (i.e., headroom) by over 15%; therefore, no impairment charge was recorded. Interim goodwill impairment tests were not performed on our remaining reporting units as there was no indication of a possible goodwill impairment. 

Consistent with our annual impairment test, we calculated the estimated fair values of the Water and Mineral Services Group Materials and Water and Mineral Services Group Specialty reporting units using the discounted cash flows and market multiple methods. Judgments inherent in these methods included the determination of appropriate discount rates, the amount and timing of expected future cash flows, revenue and margin growth rates, and appropriate benchmark companies. The cash flows used in our discounted cash flow model were based on five-year financial forecasts developed internally by management adjusted for market participant-based assumptions. Our discount rate assumptions were based on an assessment of the equity cost of capital and appropriate capital structure for our reporting units.

Future developments that we are unable to anticipate may require us to further revise the estimated future cash flows, which could adversely affect the fair value of our reporting units in future periods and result in additional impairment charges. The assumptions used in the goodwill impairment tests are classified as Level 3 inputs. 

Investments in Affiliates

Investments in affiliates are evaluated for impairment using the other-than-temporary impairment model, which requires an impairment charge to be recognized if our investments’ carrying amounts exceed their fair value, and the declineremainder is in fair value is deemed to be other than temporary. There wereselling, general and administrative expenses. The assets and liabilities of WMS met the criteria for classification as held for sale as of noDecember 31, 2021, events or changes in circumstances which would cause us to assess our investments for impairment during the nine months ended September 30,2021 or during the three months ended September 30, 2020.

During the three months ended March 31,2020, operating costs increased in certain of our foreign entity investments in affiliates which resulted in price increases and therefore a decrease in demand. The effect of this change in business climate on certain investments’ expected future operating cash flows resulted in other than temporary declines in fair value below the carrying values. Therefore, we recorded a non-cash impairment charge of $9.6 million during the nine months ended September 30, 2020 using assumptions classified as Level 3 inputs.

Other Costs

Other costs included on theour condensed consolidated statementsbalance sheet continues to reflect these assets and liabilities as held for sale as of operations primarily consistedthat date.

The following table presents summarized balance sheet information of $66.0 million in net settlement chargesassets and liabilities held for the nine months ended September 30,2021 as further described in Note 16. Other costs also included $3.5 million and $16.9 million for the three and nine months ended September 30, 2021, respectively, and $9.7 million and $28.4 million for the three and nine months ended September 30, 2020, respectively,sale:

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

4.  Revisions in Estimates

Our profit recognition related to construction contracts is based on estimates of transaction price and costs to complete each project. These estimates can vary significantly in the normal course of business as projects progress, circumstances develop and evolve, and uncertainties are resolved. Changes in estimates of transaction price and costs to complete may result in the reversal of previously recognized revenue if the current estimate adversely differs from the previous estimate. In addition, the estimated or actual recovery related to estimated costs associated with unresolved affirmative claims and back charges may be recorded in future periods or may be at values below the associated cost, which can cause fluctuations in the gross profit impact from revisions in estimates.

When we experience significant changesrevisions in our estimates, we undergo a process that includes reviewing the nature of the changes to ensure that there are no material amounts that should have been recorded in a prior period rather than as revisions in estimates for the current period. For revisions in estimates, generally we use the cumulative catch-up method for changes to the transaction price that are part of a single performance obligation. Under this method, revisions in estimates are accounted for in their entirety in the period of change. There can be no assurance that we will not experience further changes in circumstances or otherwise be required to revise our estimates in the future.

In our review of these changes for the three and nine months ended September 30, 20212022 and 20202021, we did not identify any material amounts that should have been recorded in a prior period. 

There were noThe projects with increases from revisions in estimates, which individually had an impact of $5.0 million or more on gross profit, forare summarized as follows (dollars in millions, except per share data):

The increases during the periods presented.

Decreases for all periods presented were in our Transportation segment except for onethree project in the Water segment during theand nine months ended September 30, 2021 and one2022 projectwere due to changes in the Specialty segment during each period inestimated amount of probable recovery on an outstanding claim. There were 2020no andamounts attributable to non-controlling interests for any of the nine months ended September 30, 2021. periods presented. 

The projects with decreases from revisions in estimates, which individually had an impact of $5.0 million or more on gross profit, are summarized as follows (dollars in millions, except per share data):

⁽¹⁾ The prior period amounts have been adjusted to correct an immaterial disclosure error in the previously issued September 30, 2020 condensed consolidated financial statements.

The decreases during the three and nine months ended September 30, 2021 2022were due to additional costs from acceleration of work coupled with lower productivity and higher costs than originally anticipated. The decreases during the nine months ended September 30, 2021 were also duerelated to unfavorable weather and extended project duration.duration, increased labor and materials costs, and disputed work being performed where there are ongoing legal claims. The decreases during the three and nine months ended September 30, 2020 2021were due to additional costs from differing site conditions,acceleration of work and extended project duration with lower productivity than originally anticipated and unfavorable weather.weather impacts.

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

5.  Disaggregation of Revenue

We disaggregate our revenue based on our reportable segments (see Note 19) and operating groups as these are the formats that are regularly reviewed by management. Our reportable segments are: Construction and Materials. In alphabetical order, our operating groups are: California, Central and Mountain. In connection with the reclassification of the WMS businesses from discontinued operations to continuing operations, the Condensed Consolidated Statements of Operations have been revised to include Inliner through the date of sale, Water Resources and Mineral Services in the Mountain operating group for all periods presented (see Note 3). The following tables present our disaggregated revenue by operating group (in thousands):

Three Months Ended September 30,